More Yahoo Drama as Icahn Bears Down

May 19, 2008 — -- The story around Silicon Valley was that Jerry Yang was seen high-fiveing other Yahoo execs the day that Microsoft pulled its $47.5 billion buyout offer.

I wonder if they're cheering now? With the announcement Wednesday that billionaire investor Carl Icahn is launching a proxy war to take over the company, it looks like Yahoo is about to host its own Predator's Ball over the next few months.

With his purchase of 59 million shares — $1.6 billion worth — of Yahoo stock, it appears that Icahn is going to earn a place at the directors' table at the company's Sunnyvale headquarters … and once inside, it's going to be hard to stop him.

Meanwhile, if you are Yang and company, you have to be wondering who else is out there watching and licking his chops: Malone? Redstone? You've already flung yourself into the arms of Google, hoping that your younger, better-looking counterpart actually wants you, instead of merely trying to make trouble for your equally aged, and now deeply frustrated suitor.

That Microsoft offer is probably starting to look pretty good right now … just like it always has to Yahoo's shareholders. And the company's response to Icahn's notice — that it "reflects a significant misunderstanding about the facts of the Microsoft offer" — isn't going to cut it with those shareholders.

When those shareholders look at Yahoo's current stock price, $27, and subtract the amount they suspect is due to the market's expectations of an inevitable buy-out, one suspects they are more likely to agree with Icahn's words that "the board of directors of Yahoo has acted irrationally," and that, "It is unconscionable that you have not allowed your shareholders to choose to accept an offer that represented a 72 percent premium over Yahoo's closing price of $19.18 on the day before the initial Microsoft offer."

An interesting question is just why Yahoo management let it come to this — especially since the most likely scenario now is for a hostile takeover, dismemberment of the company, and an eternal blot on their own reputations. In fact, the search for an explanation to this bizarre behavior has become something of a virtual parlor game on various high tech Web sites.

The least likely possibility is that there really was something hidden in the Microsoft bid that made the deal impossible — and that if finally brought to light would make us all slap our foreheads and say, "Well, no wonder Yahoo turned them down."

But what exactly would that be? Did Steve Ballmer suddenly turn into Larry Ellison and whisper into Yang's ear that he intended to fire every Yahoo employee the instant the ink was signed? To which Icahn would probably reply, so what? At least the shareholders (and most of the employees) would walk away with a healthy bonus, instead of wandering the decks of a slowly sinking ship.

Another possibility, mostly claimed by old Valleyites, is that Yahoo, like every other tech survivor of the early '90s, is crazy-obsessed with Microsoft — and would rather die than surrender to the Evil Empire of the North. But this is 2008, and neither Microsoft nor Yahoo is the same company it was. Plus, it is hard to believe that Icahn and thousands of pensioner shareholders are currently sobbing over Yahoo's moral predicament in refusing this shotgun wedding with its worst enemy.

A third possibility is that somebody else is whispering sweet somethings into Yahoo's ear. The likely culprit is Google, and one can understand the aging dowager getting excited by this young buck's attention. But why would Eric Schmidt want Yahoo at this point? A cynic might note that if Yahoo collapses Google will get most of its search business anyway — without the hassle of SEC investigations and Congressional hearings. Far better to simply block every other suitor and leave Yahoo lost and abandoned.

But I think there's another answer; one that explains the arrogance of Yahoo's management and the cheers along executive row that day.

Every big company has a war room, where the smartest men and women in the company — the strategic planners and the new business specialists and the marketing stars — meet to create brilliant maps to navigate the company to future success. Whatever this team has come up with has convinced them that they can restore Yahoo to its former glory … and they've managed to convince Yang and senior management that they are right.

That would explain why these folks are so smug — if everyone would just give us the chance, they seem to be saying, we'll make that Microsoft offer look puny.

There are three problems with that. First, you need to have such a plan — and so far there's been no hint of one. Second, you need to have the will, the energy and the intellectual capital to execute that plan — and for the last two years, Yahoo has looked like an old, tired company. And third, management has to convince the world, especially shareholders, that it has the best team to execute that plan.

To pull this off, you need to go three-for-three. Right now, Yahoo appears to have none of them. Indeed, we're not even sure if there is such a double super-secret magic turnaround plan to grow the company stock by 75 percent or 100 percent in the next year. And if there isn't, the world would be better off setting all of those Yahooligans free with money in their pockets to go start their own companies.

More than ever, it's time for Yahoo to swallow hard and place a call to Microsoft.

This is the opinion of the columnist, and in no way reflects the opinion of ABC News.

Michael S. Malone is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News, as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, the Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is the author or co-author of a dozen books, notably the best-selling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the ABCNEWS.com "Silicon Insider" columnist since 2000.